Faltering US giant, General Electric continues to be a lesson for other companies and investors around the world.
In the space of three years, it has gone to an industrial giant – a bit tattered around the edges, but still a blue chip, to a very expensive, high-risk investment with an uncertain future.
Its third-quarter report issued on Wednesday confirms the company’s huge loss of value and prestige.
The new CEO has cut its dividend for the second time in less than a year to the joke level of just one cent a share and unveiled a radical restructuring of its troubled power equipment division.
They might have been necessary, but they were still decisions that sparked yet another slide in the company’s share price and its market value which how stands at still substantial $US96 billion – three years ago the value was close to $US300 billion.
GE shares dropped nearly 9% to $US10.17 by the end of trading on Wednesday after the quarterly dividend was slashed from 12 cents per share to just 1 cent, allowing the company to save almost $US4 billion a year while its finances are under severe strain.
During trading, the shares hit a new all-time low of $US9.87. The day’s losses took the slide so far this month to 18% and 41% for the year to date.
GE reported a loss of $US22.8 billion for the third quarter while the company’s troubled power business lost $US631 million in the quarter and looks like losing more as the revamp grows.
GE’s other businesses reported mixed results (GE Capital is almost gone), but there was a strong performance from the business that makes jetliner engines and other aircraft parts, where profits were up 25% from $US1.3 billion to $US1.7 billion.
The slashing of the dividend to a token 1 cent a share means the payout to shareholders has collapsed from 24 cents a share last November (when it was cut to 12 cents a share by then CEO, John Flannery who was only several months into the job).
To make matters worse, GE revealed that the US Department of Justice had launched an investigation into issues including a $US22 billion non-cash write-down for goodwill at its power division, mostly relating to the 2015 acquisition of Alstom’s energy unit for $US15 billion.
The goodwill write-down is larger than the cost of the takeover – something that still puzzles even the most experienced Wall Street analysts and all a function of the convoluted accounting for takeovers standards (which also exist in Australia).
This probe is on top of the US Securities and Exchange Commission existing investigation into GE’s accounting treatment of long-term contracts and provisions for insurance liabilities. The SEC has widened this investigation to include the power division write off.
The insurance write-offs and provisioning could cost a total of $US23 billion over the next few years (to at least 2024) as the company is forced to top up the provisions needed to payout customers with long-tail claims.
The third-quarter earnings are the first to be reported under new chief executive Larry Culp, who took over earlier this month following the sudden, board inspired exit of John Flannery after less than a year in the job.
The restructuring of the power business means that with the insurance losses, write-downs and provisions, GE has made more than $US40 billion in write-downs and losses in less than a year. Losses of that size are unprecedented – especially for a company that was considered a year ago be a blue chip – fading, but still with a good reputation for prudence. No longer!
New CEO Culp will split the troubled power division unit into two — one housing GE’s traditional business of gas turbines and the other with the remaining assets, including steam turbines and grid equipment. Mr. Culp will also overhaul the power division’s management structures so the heads of the business units report directly to him.
The power equipment division was to be one of the mainstays of the company for years to come but since 2015-16 it has been whacked by the rapid rise of renewable energy and slowing demand in developed countries for legacy power systems.
The business suffered an adverse swing of more than $US1 billion, slumping into a loss of $US631 million for the quarter compared with a profit of $US464 million for the 3rd quarter of 2017.
New Orders fell 18% to $US6.6 billion for the quarter which will add to the pressures for more cost-cutting in coming quarters as the company’s factories experience a downturn in demand.
